World economy to shrink by 1.3pc: IMF

The International Monetary Fund has just released its world economic outlook revising down already bad numbers. It is now predicting the global economy will shrink by 1.3 per cent this year with Australia's growth also drastically downgraded.

Transcript

ALI MOORE, PRESENTER: The figures just keep getting worse. The International Monetary Fund has just released its world economic outlook, revising down already bad numbers. It's now predicting the global economy will shrink by 1.3 per cent this year, with Australia's growth also drastically downgraded. Washington correspondent Michael Rowland reports.

MICHAEL ROWLAND, REPORTER: The IMF says the global economy is caught in a vicious cycle.

OLIVER BLANCHARD, CHIEF ECONOMIST, IMF: The increases in demand are leading to decreases in production, to decreases in export, to increases in unemployment.

MICHAEL ROWLAND: The fund expects the world economy to shrink by 1.3 per cent this year. It says the severe recession has been caused by a massive financial crisis and an acute loss of confidence.

The IMF has taken the knife to its growth projections. The US economy is forecast to shrink by nearly three per cent this year, Britain's by slightly more, while Japan is expected to contract by more than six per cent.

The IMF has drastically downgraded its outlook for Australia's economy. It's forecasting a contraction of 1.4 per cent this year and expects the jobless rate to climb to nearly eight per cent by 2010.

The IMF expects the Australian economy to start growing again next year, albeit very slowly. In fact, it says Australia is better placed than most other countries to weather the economic storm. It points to the economic stimulus measures already introduced and also notes the Reserve Bank still has room to cut official interest rates.

The IMF is less sanguine about America's prospects. The fund is concerned about the effectiveness of the various efforts to rescue troubled banks, and it's not alone

JOSEPH STIGLITZ, ECONOMIST: Our bailouts run the risk of transferring large amounts of money to those banks that did the worst job in risk management.

MICHAEL ROWLAND: The administration is continuing to defend its response.

TIMOTHY GEITHNER, US TREASURY SECRETARY: Our central objective, our obligation, is to ensure that the financial system is stable and it's able to provide the credit necessary for economic recovery.

MICHAEL ROWLAND: And the IMF hopes that will happen within the next 12 months.